How To Analyze A Charity Before Giving

The largest 100 U.S. charities together took in $46 billion of private donations during their latest reporting fiscal years.

Courtesy Compassion International

This is the time of the year when many charities step up their fundraising efforts. The pitches come in many ways: email, Facebook displays, people standing outside stores with collection baskets, snail mail, phone calls, press releases published everywhere, even tweets. With more than 1 million nonprofits, the barrage can be overwhelming. You want to give, but you also want your hard earned dollars to do real good.

Many charities don't make it easy for donors to effectively evaluate them. They might emphasize one small but interesting element of what they do that's not really representative of how they spend most of their money. Few that employ outside paid telemarketers to cold-call folks on the telephone are likely to volunteer the fact that more of the donation may go to the fundraiser rather than to good works.

However, a would-be donor can become an intelligent donor. The trick is to seek out solid and reliable information before handing over your money. The annual Forbes list of the 100 largest U.S. charities can be of assistance in your evaluation, even if a charity drawing your interest is not among them.

Be clear that the Forbes list is not judgmental, or a Good Housekeeping sign of approval. It is a roster of the 100 biggest, not the 100 best, even if valid criteria for such a determination could be determined. The entries are derived from information found in official filings like IRS Form 990 tax returns, which are public record, audited financial statements or Forbes survey forms filled out by the charities themselves. Over the years--and this is the 19th year for this list--we occasionally have eliminated nonprofits for accounting we considered dubious or misleading, usually concerning valuation of donated goods.

The Forbes list is calculated on the amount of private gifts received in the latest available fiscal year. The donations can come from private individuals, corporations and other business entities, other nonprofits, federated campaigns and estates, but not governments or their agencies. This largess can be in the form of cash, stock and goods, often called gift-in-kind.

In our counting, donations have to be with nothing coming back to the donor in return other than the personal pleasure of backing a good cause. So we exclude revenue items like membership dues for a museum, reasoning that the donor/member is getting a reduced admission price. We also exclude fees for goods and services, such as daycare help, and investment returns. We do include these items in other revenue.

Various kinds of nonprofits are excluded by definition, generally because the goal of our list is to look at organizations appealing to the general public. Excluded categories include academic institutions, which tend to seek gifts only from their alumni; donor-advised funds, which oversee gifts for many different individual donors; and the many religious entities that don't furnish information. Also excluded are nonprofits with very few direct donors--a classification that includes almost all private foundations--and charities that receive the bulk of their donations indirectly via fundraising drives run by others in the community chest model.

We compute several financial efficiency ratios for each of the charities on the list, while indicating the direction of any change from the prior year. While we think financial efficiency is important, it's far from the only factor a would-be donor should consider. Overhead, which figures into these calculations, is not all bad. Like all businesses, charities have to fund staff and rent. The trick is to identify those charities with out-of-line ratios and no good explanations for the variance.

Herewith comes our annual warning: Do not compare efficiency ratios for different kinds of charities. The ratios for a museum cannot be meaningfully compared with that of, say, a hospital or a foreign aid organization.

Nevertheless, efficiency ratios have a valid role in charitable analysis. If in the same field of activity, charity A has better efficiencies than Charity B, Charity B could be asked why that is or to offer an explanation of why it does a better job overall than Charity A, even if the efficiency numbers don't look as good.

The Forbes list includes all kinds of charities. Say you're thinking of giving to a charity not on the list. Find several on the list that seem to do the same thing, see how the efficiencies compare--then seek out answers to questions. Information needed to calculate efficiencies of most nonprofits can be found on the IRS Form 990 tax return (on parts VIII and IX), a formal financial statement or an annual report. Increasingly, some or all of these documents can be found on the charities' own website. Many Form 990s can be downloaded for free from Guidestar or the Foundation Center.

Here are the three efficiency ratios we present:

CHARITABLE COMMITMENT This is how how much of a charity’s total expense went directly to the charitable purpose (also known as program support or program expense), as opposed to management, certain overhead expenses and fundraising. The average this year is 87%, up from 85% last year. Charities that receive most of their donations as gift-in-kind do better here, because individual gifts are larger and involve little or no fundraising expense. Charity watchdogs such as the Better Business Bureau Wise Giving Alliance say charitable commitment should be no lower than 65%. No charity on our list is below 68%.

FUNDRAISING EFFICIENCY This reveals the percent of private donations remaining after deducting the costs of getting them. The average for all 100 charities is 91%--up from 89% last year-- meaning that it cost 9 cents to raise $1. But this is an average of very different kinds of charities using very different fundraising procedures. With fewer but larger donations and perhaps puffed-up valuations, some gift-in-kind charities look very efficient, with fundraising efficiencies of 100% (rounded) or very close. At the other end are charities employing expensive direct-mail and telephone solicitation. While the BBB considers 65% to be the bottom of respectability, at Forbes we draw the line at 70%. No one on the list this year is below 73%.

DONOR DEPENDENCY This is a fascinating ratio, calculating how badly a nonprofit needed contributions to break even. A ratio of 100% means revenues were the same as expenses. A ratio higher than 100% means the charity had more expenses than revenue. A negative ratio (below 0%) means the charity had an annual surplus greater than all private donations! (This is often a hospital or a museum). The average for the list is 91%; the typical charity was able to put away 9% of donations for the future. The donor dependency ratio is extremely sensitive to investment results and for many charities varies wildly from year to year. For the other two ratios, the higher the ratio, the better, especially in year-to-year change. But the significance of donor dependency depends on the donor. If the donor's goal is to fund poor and needy charities, a rating above 100 might be considered good. On the other hand, if the goal is for charities that better stand on their own, a rating below 100 might be viewed as optimal. This ratio does smoke out charities pleading for money that actually have substantial financial reserves or other kinds of revenue.

Click here to see the full Forbes list of America's Top Charities 2017.